The UBS Yield Enhancement Strategy
Many customers of UBS ("Union Bank of Switzerland") Financial Services were given the recommendation to invest in a cryptic options strategy employing leverage. The customers elected to follow the recommendation because the concept was described as having lower risk and was also deemed a conservative strategy. The entire premise of the strategy was that a UBS customer could, while protecting his or her existing portfolio, garner modest income and do it safely. It was billed as a Yield Enhancement Strategy or YES for short.
In actuality, the risks were much greater than represented, although UBS managed to provide the modest income component. While the market was good the UBS clients were impervious to risks. However, when things got bad, the losses increased much greater than what was represented. Given the modest returns, maybe 4%, the risk/reward ratio was completely off. Moreover, it will take some time to recoup large losses at such a modest rate of return.
Customers in the YES program were completely caught off guard back in December 2019 when the strategy caused a 20% decline in customer portfolios. The declines of late February and early March exacerbated the losses. This is not what YES investors signed up for when they agreed to the recommendation. It certainly appears the risks of the strategy were misrepresented and YES investors are furious. Rightly so.
As is common, UBS has demurred any accusations of unsuitability or misrepresentations, etc. They assert their customers signed copious amounts of documentation exonerating them of any wrongdoing. UBS is likely referring to various documents with self-serving boilerplate language. What the common consumer understands is what his or her financial advisor represents to them in conversation. Generally speaking, customers of major brokerage firms have long-standing and close relationships with their financial advisors. They would have no reason to believe their trusted advisor was making gross misrepresentations. Usually, the financial advisor himself does not know what is in the boilerplate langue and believes the very sales-pitch being delivered to the customer. Likely, the same scenario occurred with many of the YES recommendations.
The standard pitch was that the correlation between bonds and equities was minor in the YES program. The concept was that option strategies designed by a team of experts at UBS would be utilized to temper any downturn in a portfolio. At the same time, the customer would receive a modest return of about 4%. The problem was the strategy charged the client 1.75%. This charge was on top of whatever management fee UBS was already charging to manage the underlying portfolio.
The YES strategy has been run by a group known as Flatiron Partners which operates within UBS and its private wealth management unit. The so-called masterminds behind the strategy are Matthew Buchsbaum and Scott Rosenberg. Prior to UBS, this same group was with Credit Suisse. At UBS, the group's YES program was made available to the over 6,500 financial advisors. It is believed the strategy encompassed about $5 billion in assets at UBS. At a charge of 1.75% on assets, it is believed fees approached $87.5 million per year. It is estimated that that customer losses exceed $1 billion.
In a nutshell, YES was supposed to boost yields without over-exposing the underlying assets. To do this, the strategy employed something known as an "Iron Condor". An Iron Condor utilizes 4 distinctive options contracts, but they have to have the same expiration date, however, they must utilize different exercise prices. The options are based on an index such as the NASDQ. (Apparently, YES used S&P 500 Index futures). Income was generated by selling calls and puts at the same time. The hedge component was created by purchasing calls and puts at the same time. The customer's underlying portfolio is used as collateral for the options transactions. All is well, assuming the prices do not fluctuate outside certain parameters dictated by the spreads. Unexpected fluctuations in the market can cause the options to exceed the parameters, which in turn cause losses. Losses which were not expected by conservative investors seeking a mild yield boost with little downside. There have been a number of lawsuits filed against UBS through the FINRA process. If you were a victim of UBS and the YES program please contact us for a free consultation.